Good News & Bad News, page-40335

First of all, and I'll discuss PEs below, BHP's current PE is 19.3. Today.

We’re at 680,000 tonnes per annum of production. I’ll use your criteria, so my calculations are based on a price for SC6 this fiscal year of U$1,500 per tonne for this year (“mid teens”). Since we’re selling SC5.3, that translates to U$1,325 for our product. At today’s exchange rate (USD to AUD) of 1.51, that’s A$2,000.75, so I’ll be utilizing A$2K even.

The latest data for costs, from the 1H (2Q) 24 Quarterly Report, was A$900 per tonne (CIF). The decrease in cost over six months from the 2023 Year End Report is partly operational improvements but mostly decreased royalties.

At A$2,000 per tonne for our SC 5.3, 680 ktpa will bring in A$1.36B. All-in cost for the year will be right around A$612M, yielding an operational profit in the neighborhood of A$748M. Out of that, there is approximately A$100M in corporate and other non-operational expenses (A$50M for 1H 24, from the aforementioned report), so total annual profit should be at or near A$648M.

With almost 3.1B shares outstanding, that profit works out to EPS of approximately A$0.21.

As of today (source:Simply Wall Street), the average P/E for the Australian Mining Industry is actually 22.4 (today, BHP has a P/E of 19.3, and they’re paying more in dividends than they’re earning). The five year average for the industry is 14x. You’ve made your opinion clear about P/Es, but here is the link to the actual facts, and note that this is specific to the Australian Mining Industry:

https://**.st/markets/au/materials/metals-mining#:~:text=The%20industry%20is%20trading%20at,average%20PE%20of%2012.8x.

Using the five year average, to stay uber conservative, a P/E of 14 applied to earnings of A$0.21 yields a fair target price of approximately A$2.94.

Using the current industry average P/E of 22.4, a fair target price is A$4.70.

Using BHP’s current P/E of 19.3, a fair target price is A$4.05.

To be honest, I think it’s easy to make an argument that PLS merits an even higher than average P/E, since they're among the best managed firms in the industry, you don’t see many mining companies that will see their output increase by more than 50% in the next 12 to 18 months (P1000) or that have $2.1B in the bank.

As an aside, if the SC6 price rises U$500 per tonne, that’s U$442 per tonne for our SC5.3, or A$667 per tonne. That means that profit rises by A$453.5M, or A$0.146 per share, for every U$500 increase in the price of SC6.

All of this discussion is based on today’s numbers. Even if SC6 prices don’t move for the next two years (and they will), PLS is currently producing 680 ktpa of SC5.3, but within the next two years, they will be producing 1mtpa of SC5.3 AND 30% of a 43 ktpa LiOH plant AND a minimum of 6 ktpa of Li3PO4. Revenue and profit will both rise by more than 50%, without an increase in SC6 prices. Not only can we easily justify the current share price, but it is also easy to see the SP at $7 in 12-18 months, even at these low SC6 prices. If we see an average of just U$2,000 per tonne for SC6, PLS is a $10 stock in 12-18 months.

Finally, consider this scenario. Two years from now, when the pricing pendulum has swung back (and it will), the price for SC6 is U$3,000 per tonne and the price for LiOH is U$25,000 per tonne. Those are very moderate numbers, considering how prices have acted over the past ten years, especially the past two boom cycles, but I'm trying to remain conservative, especially with the LiOH price.

SC5.3 production: 1M tonnes at A$4,500 (U$3,000) represents A$4.5B

LiOH production: 12,900 tonnes (30% of 43 kt) at A$37,500 (U$25,000) represents A$483.75M

Throw-in 3 ktpa of Li3PO4 production, which will bring in a bit more than A$50M, conservatively, and PLS is doing a bit more than A$5B, with profits in excess of A$3B. Even with only a 10x P/E, that's a $10 SP on EPS of $1, and probably a $0.40 to $0.50 dividend.

I can wait two more years, and nothing about my valuations takes into account the very real possibility that the pricing pendulum swings MUCH further, whether it's in two years or five, and we're seeing SC6 prices at $6K or $7K and LiOH prices at $30K to $40K.

Have a nice day, and a great week, all